Monthly Archives: January 2014

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The National Underwriter Co., a publisher of tax, insurance and financial planning information, has released the newest addition to its Tax Facts reference library, Tax Facts on Individuals & Small Business.

The book, by Robert Bloink and William Byrnes, is billed as a tax reference for CPAs, financial advisors and planners, insurance professionals, attorneys and other practitioners advising small businesses and individuals.

Recent changes in tax law have raised questions for taxpayers regarding health care, home offices, capital gains, investments and whether a worker is an employee or a contractor. Individuals & Small Business aims to provide “fast, clear and authoritative answers,” according to the publisher, using a Q-and-A format. “Who is an ‘employee’ for employment tax purposes?” reads the initial headline for a section of the book, for instance.

Other topics include business deductions and losses, business life insurance, small-business valuation and entity choices, accounting, capital gains, investor losses, new Medicare and Net Investment Income taxes, and individual income tax.

The authors are with the Thomas Jefferson School of Law in San Diego. Bloink is a professor of tax for the graduate program of international tax and financial services and previously served as senior attorney in the IRS Office of Chief Counsel. Byrnes is associate dean, graduate and distance education, and a Fulbright specialist for the areas of comparative law and taxation.

A federal district court judge has ruled in favor of the federal government in a lawsuit that claimed the Internal Revenue Service did not have the authority under the Affordable Care Act to write rules providing tax credits to individuals purchasing health insurance on the health insurance exchange set up by the federal government.

The IRS issued a final rule in May 2012 implementing the premium tax credit provision of the Affordable Care Act, in which it interpreted the ACA as authorizing the agency to grant tax credits to individuals who purchase insurance on either a state-run health insurance exchange or a federal exchange such as the one that has been available on the problem-prone HealthCare.gov site for people in states that have not set up state exchanges.

The plaintiffs in the lawsuit, who include the conservative advocacy organization, the Competitive Enterprise Institute, contended that the IRS’s interpretation was contrary to the statute, which, they asserted, authorizes tax credits only for individuals who purchase insurance on state-run exchanges, but not on federal exchanges. The plaintiffs in the case, known as Jacqueline Halbig, et al v. Kathleen Sebelius, et al, claimed that the rule promulgated by the IRS exceeded the agency’s statutory authority and was arbitrary, capricious and contrary to law, in violation of the Administrative Procedure Act.

The U.S. District Court for the District of Columbia heard oral arguments in the case last month and a judge on the court tossed out the lawsuit Wednesday, agreeing with the federal government that the law made clear that the tax credits should be available on both state-run and federally run health insurance exchanges.

“In sum, the Court finds that the plain text of the statute, the statutory structure, and the statutory purpose make clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated exchanges,” wrote U.S. District Judge Paul Friedman. “What little relevant legislative history exists further supports this conclusion and certainly—despite plaintiffs’ best efforts to suggest otherwise—it does not undermine it.”

Sam Kazman, general counsel for the Competitive Enterprise Institute, said he planned to appeal the judge’s ruling.

“The court’s ruling today delivers a major blow to the states that chose not to participate in the Obamacare insurance exchange program,” Kazman said in a statement Wednesday. “It is also a blow to the small businesses, employees and individuals who live in those states as well. In upholding this IRS regulation that is contrary to the law enacted by Congress, this decision guts the choice made by a majority of the states to stay out of the exchange program. It imposes Obamacare penalties on employers and on many individuals in those states, penalties that Congress never authorized, putting their livelihoods and the jobs of their employees at risk. Worst of all, it gives a stamp of approval to the Administration’s attempt to substitute its version of Obamacare for the law that Congress enacted.”

The former secretary to Imelda Marcos, the one-time First Lady of the Philippines, has been sentenced to serve between two and six years in prison for tax evasion and ordered to pay the State of New York $3.5 million in taxes after she was accused of stealing and illegally selling a painting by the French Impressionist master Claude Monet for $28 million.

The painting actually belonged to the Philippine government, according to prosecutors. Imelda Marcos fled to the United States when her husband, longtime president Ferdinand Marcos, was deposed in 1986 amid allegations of vote rigging that led to massive protests. She famously left behind 1,060 pairs of shoes in the presidential palace. Ferdinand Marcos died in 1989, and his widow took up residence in New York.

The New York State Department of Taxation and Finance said Tuesday that Vilma Bautista, the former secretary to Imelda Marcos, was sentenced on January 13 in New York Supreme Court. A Manhattan jury had found Bautista, 75, guilty last November of first-degree criminal tax fraud, fourth-degree conspiracy, and first-degree offering a false instrument for filing.

Bautista had sold one of the paintings in Monet’s Water Lilies series, “Le Bassin aux Nympheas,” for $28 million, but the sale was not reported as income on Bautista’s 2010 personal income tax return. As a result she was ordered by the court to pay New York State $3.5 million in taxes on the sale.

Mrs. Marcos amassed a large art collection, including works that she claimed to be purchasing on behalf of the Philippine government. Many of the artworks disappeared from her townhouse on Manhattan’s Upper East Side around the time that the Marcos regime was collapsing in the Philippines and the whereabouts were unknown until Bautista and two of her nephews began trying to quietly sell the paintings in 2010.

The Tax Department’s Criminal Investigations Division worked closely on the investigation and prosecution of the case with the office of Manhattan District Attorney Cyrus R. Vance, Jr.

“We commend District Attorney Vance for his successful prosecution of this extraordinary case,” said Commissioner of Taxation of Finance Thomas H. Mattox in a statement. “We will continue to work with all levels of law enforcement to bring individuals who commit tax crimes to justice.”

The United States is falling behind Europe and China in efforts to capitalize on globalization and could potentially miss out on future economic growth as a result, according to a new survey by the international accounting and consulting network UHY.

UHY tax and business advisory professionals in 27 countries rated their economies on several factors, including taxation and trade policy, that indicate how internationalized an economy already is and how well positioned it is to take advantage of future globalization of trade.

The factors examined in UHY’s study included how successful a country has been in negotiating favorable tax arrangements with potential trading partners, how successful it has been in growing exports, how important a part trade already plays in its economy, how much tax it imposes on companies “repatriating” overseas profits, how it is rated in the World Bank’s “Ease of Doing Business” survey along with labor costs.

Based on these factors, the U.S. scored 3.7, far behind both China, with its score of 4.6, and the EU member states, with an average score of 5.2 out of a maximum of 10.

While the U.S. did well on the “Ease of Doing Business” rating, placing fourth globally, its economy remained more aligned to domestic activity than many of its competitors. The U.S. also had low scores for certain factors measuring success in negotiating favorable tax treatment by trading partners. At 35 percent, the USA levied the highest gross tax charge on repatriated profits of any country examined by UHY.

Germany topped the ratings with a score of 6.4 out of ten, while Slovakia was not far behind with 6.3 points. China was the best-performing of the world’s top three economies with a score of 4.6, and India was the best-performing BRIC country with a score of 5.1, helped by its low labor costs with an average monthly salary less than half as high as China’s.

“The USA ranked poorly in the survey, suggesting that while it is cushioned by the sheer size of its own domestic economy, it could achieve more by doing more to encourage and support American companies in exporting and expanding overseas,” said UHY Advisors COO Richard David in a statement. “One key factor hampering the US from fully harnessing globalization is that it levies the highest tax charge on repatriated profits of all countries, potentially acting as a significant barrier to domestic companies looking to expand overseas.”

While China did far better overall than the U.S., with an overall score of 4.6 out of 10, both of the world’s two largest economies’ scores were brought down by the high taxes their governments impose on corporates “repatriating” overseas profits, according to the survey.

UHY said the taxes reduce the incentive for businesses to set up subsidiaries overseas, particularly for small and midsize businesses for which the costs of setting up international operations would be proportionately more expensive. Just under half of the countries in the study imposed no tax on repatriated dividends at all.

Opponents of tax breaks on repatriated corporate profits point to how low the effective tax rates are for many multinational companies already. In some cases, multinationals are able to avoid paying corporate taxes in the U.S. entirely by moving their profits to low-tax countries, even though the statutory tax rate in the U.S. seems relatively high at up to 35 percent.

Many considered Dec. 31, 2013, the final date for year-end tax planning, but there are numerous planning actions that you can take in 2014 retroactive to 2013. Here’s a quick and easy guide to help you with your planning.

Retirement Plans
• Conventional and Roth IRA contributions for 2013 can be made until the April 15 return due date for the payment to be attributed to 2013.

• Contributions for Keogh, SIMPLE and 401(k) can be made up until the due date of the return including extensions. However, the Keogh, SIMPLE and 401(k) plans must have been established before the end of 2013 (Sept. 30 for SIMPLE plans), unlike the IRAs.

• SEP plans can be opened any time in 2014 until the tax return due date, including extensions, and/or payment delayed until then for the 2013 deduction to be allowed.

Stock Sales
• Wash sales occur when stock sold at a loss is reacquired within 30 days before or after the stock’s sale. For sales made in December 2013 that had a loss, repurchasing the stock this month (within the 30-day prohibited period) will cause the 2013 loss to be disallowed and added to the basis of the January 2014 purchased shares.

Estimated Tax
• The final estimated tax installment is due Jan. 15; however, if that installment isn’t paid but the return is filed and the full tax is paid by Jan. 31 there will be no penalty for underpaying that installment.

Trusts, Estates and Foundations
• Distributions from trusts and estates that are made within 65 days after the end of the year can be attributed to 2013 if the appropriate box is checked on Form 1041 when the return is filed for 2013.

• Private charitable foundations can make distributions related to 2013 income until the end of 2014.

• Grantor trusts that mistakenly obtained a taxpayer identification number can notify their banks, brokers and others of the future use of the grantor’s Social Security Number and the discontinuance of the TIN eliminating the need to continue filing trust tax returns.

• Estates for people dying in 2013 can elect the six months later alternate valuation date on a timely filed estate tax return.

• Qualified disclaimers can be made within nine months of death for people that died in 2013, as long as the funds were not distributed or otherwise used by the beneficiary.

• Estates can make many elections retroactively on the estate tax returns up until the return’s due date.

Business Issues
• C corporations and personal holding companies, or PHCs, that pay dividends by March 15, 2014 can elect to have those dividends attributed to 2013 in order to avoid the imposition of the accumulated earnings penalty or PHC tax.

• Businesses that want to claim inventory devaluations of regular for sale items should consider 2014 sales at the reduced amounts prior to the filing of the 2013 tax return that will report the write downs.

• Businesses with a 2013 installment sale can elect out of the installment treatment if their 2013 tax bracket will be much lower than 2014 and later years are expected to be. This decision can be made before you file your 2013 tax return.

• Last in – first out, or LIFO, inventory valuation conversions can be done until due date of the 2013 tax return.

• People who had informal partnerships and joint ventures in 2013 should consider filing partnership tax returns and issuing K-1s to report those activities. Formal partnership agreements are not necessary to have a valid partnership for tax purposes.

Employee Issues
• Cafeteria plans and flexible spending accounts can make payments and reimbursements for 2013 salary-reduction amounts or applicable expenses incurred and paid through March 15, 2014 if the plan permits it.

• Compensation is generally reported when received or made available to the recipient; however, if it is paid by check and the delivery of the check is delayed or otherwise not made available for collection, then the income does not need to be reported until the payment is actually received. For example, if a commission check is written at the end of 2013 and mailed to the payee while the payee is traveling or on vacation until January, then the payee will not have to report the income until 2014 (the year of actual receipt) even though his or her Form 1099 would show the 2013 payment. If this is the case, appropriate disclosure must be made on the 2013 tax return explaining why the Form 1099 amount is greater than the amount reported. Alternatively you can report the entire amount on the 1099 and on a different line on the return show a subtraction for the amount not actually received, and provide an explanation. Note that if the funds had been wired into the payee’s account by Dec. 31, it would be considered received because if they wished to withdraw it at that point, they could have.

• Credit card charges made in 2013 for deductible items are reportable on the 2013 tax return even though not paid until 2014 or later.

• Certain employer payments for deferred compensation plans are deductible in 2013 even if they are not paid until 2014, as long as they are paid by March 15, 2014. In such a case, the employee would report the income when received.

• An employee who received employer-granted restricted stock or ISOs in December 2013 can make an election within 30 days after receiving the stock to report the income or AMT in the year the stock or ISO was received rather than when the restrictions lapse. This election is made pursuant to Internal Revenue Code Section 83(b). A timely January election will have the income taxed on the 2013 tax return.

• Receipts for 2013 charitable contributions must be received by April 15, 2014 for such deductions to be allowable. If qualified appraisals are necessary, they must be attached to the returns. The receipts and appraisals can be prepared in 2014 for the 2013 contributions.

The above are some items where post-2013 planning can affect the 2013 tax return. Many of these steps involve technical issues and a professional tax advisor should be consulted prior to acting upon them. Some of these actions will need to be done right away, while others allow some time.

The Securities and Exchange Commission has charged Diamond Foods and two of the San Francisco-based snack foods company’s former executives for their roles in an accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts, and the company has agreed to pay $5 million to settle the SEC’s charges.

Diamond’s then-CFO Steven Neil allegedly directed an effort to fraudulently underreport money paid to walnut growers by delaying the recording of payments into later fiscal periods. In internal e-mails, Neil referred to these commodity costs as a “lever” to manage earnings in Diamond’s financial statements.

By manipulating walnut costs, the company was able to report higher net income and inflated earnings to exceed analysts’ estimates for fiscal quarters in 2010 and 2011. After Diamond restated its financial results in November 2012 to reflect the true costs of acquiring walnuts, the company’s stock price slid to just $17 per share from a high of $90 per share in 2011.

Diamond agreed to pay $5 million to settle the charges. Former CEO Michael Mendes also agreed to settle charges against him, but the SEC said its litigation is continuing against the former CFO.

“Diamond Foods misled investors on Main Street to believe that the company was consistently beating earnings estimates on Wall Street,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office, in a statement. “Corporate officers cannot manipulate fiscal numbers to create a false impression of consistent earnings growth.”

One of Diamond’s main lines of business involves buying walnuts from growers and selling the walnuts to retailers. As walnut prices sharply increased in 2010, Diamond found it needed to pay more to its growers in order to maintain longstanding relationships with them. Yet Diamond could not increase the amounts paid to growers for walnuts, without also decreasing the net income that Diamond reported to investors. Neil was facing pressure to meet or exceed the earnings estimates of Wall Street stock analysts.

The SEC alleges that while faced with competing demands, Neil orchestrated a scheme to have it both ways. He devised two special payments to please Diamond’s walnut growers and bring the total yearly amounts paid to growers closer to market prices, but improperly excluded portions of those payments from year-end financial statements.

Instead of correctly recording the costs on Diamond’s books, Neil instructed his finance team to consider the payments as advances on crops that had not yet been delivered. By disguising the fact that the payments were related to prior crop deliveries, Diamond was able to manipulate walnut costs in its accounting to hit quarterly targets for earnings per share and exceed analyst estimates. For instance, after adjusting the walnut cost in order to meet an EPS target for the second quarter of 2010, Diamond went on to tout its record of “Twelve Consecutive Quarters of Outperformance” in its reported EPS results during investor presentations.

The SEC also alleges that Neil misled Diamond’s independent auditors by giving false and incomplete information to justify the unusual accounting treatment for the payments. Neil personally benefited from the fraud by receiving cash bonuses and other compensation based on Diamond’s reported EPS in fiscal years 2010 and 2011.

The SEC’s order against Mendes finds that he should have known that Diamond’s reported walnut cost was incorrect because of information he received at the time, and he omitted facts in certain representations to Diamond’s outside auditors about the special walnut payments. Mendes agreed to pay a $125,000 penalty to settle the charges without admitting or denying the allegations. Mendes already has returned or forfeited more than $4 million in bonuses and other benefits he received during the time of the company’s fraudulent financial reporting.

The SEC’s complaints against Diamond and Neil allege that they violated or caused violations of the securities laws. Diamond agreed to settle the charges without admitting or denying the allegations. The SEC took into account Diamond’s cooperation with the SEC’s investigation and its remedial efforts once the fraud came to light. The penalties collected from Diamond and Mendes may be distributed to harmed investors if SEC staff determines that a distribution is feasible.

Low and moderate-income workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2013 tax return.

Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply and helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. Taxpayers have until April 15, 2014, to set up a new individual retirement arrangement or add money to an existing IRA for 2013.

Most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Note: Elective deferrals (contributions) must have been made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees.

The saver’s credit can be claimed by:

Married couples filing jointly with incomes up to $60,000 in 2014;

Heads of Household with incomes up to $45,000 in 2014; and

Married individuals filing separately and singles with incomes up to $30,000 in 2014.

The saver’s credit can increase a taxpayer’s refund or reduce the tax owed. The maximum saver’s credit is $1,000 for single filers and $2,000 for married couples and is based on filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.

Other special rules that apply to the saver’s credit include the following:

Eligible taxpayers must be at least 18 years of age.

Anyone claimed as a dependent on someone else’s return cannot take the credit.

A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

In tax-year 2011, the most recent year for which complete figures are available, saver’s credits totaling just over $1.1 billion were claimed on nearly 6.4 million individual income tax returns. Saver’s credits claimed on these returns averaged $215 for joint filers, $166 for heads of household and $128 for single filers.

Can you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination?

Not quite. You can’t let your business run on autopilot and expect good results. Any business owner knows you need to make numerous adjustments along the way – decisions about pricing, hiring, investments, and so on.

So, how do you handle the array of questions facing you?

One way is through cost accounting.

Cost Accounting Helps You Make Informed Decisions

Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions – raw materials, labor, inventory, and overhead, among others.

Note: Cost accounting differs from financial accounting because it’s only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.

Cost accounting allows you to understand the following:

Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?

Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.

Budgeting. You can’t create an effective budget if you don’t know the real costs of the line items.

Is It Hard?

To monitor your company’s costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.

Fixed costs don’t fluctuate with changes in production or sales. They include:

rent

insurance

dues and subscriptions

equipment leases

payments on loans

management salaries

advertising

Variable costs DO change with variations in production and sales. Variable costs include:

raw materials

hourly wages and commissions

utilities

inventory

office supplies

packaging, mailing, and shipping costs

Tip: Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company’s functioning.

In 2014, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2014 returns, filed by most taxpayers in April 2015, include the following:

The value of each personal and dependent exemption, available to most taxpayers, is $3,950, up $50 from 2013.

The new standard deduction is $12,400 for married couples filing a joint return, up $200, $6,200 for singles and married individuals filing separately, up $100, and $9,100 for heads of household, also up $150. The additional standard deduction for blind people and senior citizens is $1,200 for married individuals and $1,550 for singles and heads of household. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $73,800, up from $72,500 in 2013.

For 2014, more than 40 tax provisions are affected by inflation adjustments, including personal exemptions, AMT exemption amounts, and foreign earned income exclusion, as well as most retirement contribution limits.

For 2014, the tax rate structure, which ranges from 10 to 39.6 percent, remains the same as in 2013, but tax-bracket thresholds increase for each filing status. Standard deductions and the personal exemption have also been adjusted upward to reflect inflation.